CBO Issues Report on Student Loan Interest Rates

Credit subsidies estimated using the fair-value methodology represent a broader measure of cost that includes the cost of market risk. The fair value of a student loan approximates its value in a competitive private market, and a fair-value subsidy occurs whenever the government accepts less stringent terms than private-sector lenders would require to make comparable loans.

Taking account of the cost of market risk significantly reduces or eliminates the savings estimated for student loans under the FCRA approach, making student loans costly to the federal government in most years during the coming decade. CBO projects that direct student loans issued between 2013 and 2023 would cost $95 billion on a fair-value basis, in contrast with the projected savings of $184 billion under FCRA accounting. Under either accounting method, the program will be much less financially advantageous to the federal government in 2018 and beyond than in 2013 (see Figure 1). (Page 6)

I feel bad for the CBO. It’s like the Federal Credit Reform Act has tied its hands behind its back, and it desperately wants to break free and scream, “These loan programs are a really bad idea!”

So, care to guess how much of that $95 billion in cumulative losses will be Grad PLUS loans, much less Grad PLUS loans to law students?